How to Choose a Debt Management Company
Using a debt management company to help you manage paying off your debts is a way of addressing your debt problems without having to face the more serious issue of court action.
If you feel you can no longer continue struggling to pay your debts and want a solution to the problem a debt management company could be right for you. What you must be aware of though, is that you will have to pay them a fee for their debt management services, which will be approximately 15% of your monthly payments.
Why do I need a debt management company?
Many of us don´t want the stress of having to talk to and negotiate with our creditors. It’s bad enough receiving the bills and phone calls each month, and sometimes the problem seems impossible to deal with.
Ignoring debt problems isn´t the answer. Facing debt problems is the responsible way forward, and a debt management company can help you get your finances under control. They will work out a debt management plan (DMP) tailored to you and that you can realistically afford to pay.
What is a debt management company?
A debt management company advises people on how to pay off their debts in the best way possible for their personal circumstances. The company charges a fee for this service. They also administer your debts, so you pay the company one amount every month and they deal with dividing the money between your creditors.
There is free debt management advice, from charities such as the Citizen´s Advice Bureau (CAB), StepChange (formerly the Consumer Credit Counselling Service) and National Debtline. These charities may be able to work on your behalf with no fee to set up a debt management plan, or they may refer you to a reputable debt management company.
Because of the large number of debt problems in the UK it may take time for these charities to deal with your case. In December 2014 the CAB was dealing with 6,389 debt problems every working day in the UK (source: The Money Charity). That’s a lot of people with debt problems.
Be wary of companies offering ‘free’ debt management plans and advice with no fees or "Government Debt Help". Unless they are a reputable charity, such as the ones mentioned above, it is unlikely they will be giving you anything ‘free’. Their fees are likely to be hidden in the payments you make to them each month, or they may ask for a one off fee, which you should never pay.
So you may decide it would be better to pay a fee charging debt management company each month. You are more likely to receive dedicated attention and service this way. Another few weeks waiting for a debt management charity to deal with your case are weeks when you could be paying off your debts and be one step nearer to financial freedom.
A debt management company will:
- Prioritise your debts to help you see which it will be most cost effective to pay off first.
- Assess your individual financial situation and will give you impartial advice.
- Negotiate and deal with your creditors on your behalf (for example ask them if they will freeze further interest charges).
- Pay your creditors after you have paid the debt management company each month.
For this service you will be charged a fee of approximately 15% of your agreed monthly payments. You will only be paying one payment a month to the debt management company and this will be a payment that you can realistically afford.
Questions to ask a debt management company
If you believe using a debt management company is right for you it’s important to choose one that is regulated by the Financial Conduct Authority (FCA), formerly the Office of Fair Trading. This means the company has been assessed to ensure they operate in a fair and legal way and have your interests as their main priority.
Beware of the many debt management companies advertising on the internet who are only interested in making a profit.
When choosing a debt management company you should ask:
- Are they regulated by the FCA?
- How much are the fees? These should be clear and you should not have to pay an up-front fee for advice.
- Will you have a person dedicated to your case for advice whenever you need it?
- Will there be an annual review of your circumstances?
- Is advice available for the whole term of the debt management plan?
Things to consider when setting up a debt management plan
When considering committing to a debt management plan you should think seriously about the consequences. Yes, it is a way of competently managing your debts but there are issues to take into account, such as:
- You should be sure you have some available spare income each month, of at least £50.
- You must be disciplined and make the agreed payments to the debt management company on the agreed date each month.
- If your financial circumstances get worse and you default on payments court action may be taken against you. Therefore you should only consider a debt management plan if you think your situation will stay roughly the same or improve over the next few years.
- A debt management plan is a commitment to pay off the full amount owed, which could be a drawback for people with large debts.
- Having a debt management plan is put on your credit reference file, which means you may have difficulty getting credit in the future.
- There is no guarantee your creditors will accept the proposal from the debt management company, it is at their discretion. If they refuse you they can still take court action against you.
- Special deals such as ‘only pay £1 per month towards your debts’ may seem tempting but in reality they are not the way to pay back a debt. Paying such a small amount means you will spend a lifetime in debt. Wouldn´t it be better to be debt free as soon as possible?